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Friday, 10 May 2013

The pressure on Germany is rising

A common theme in my recent posts regarding the Euro crisis, or really the crisis of the countries that have been bailed out and have to absorb substantial austerity measures at a time of sharp economic contraction, has been that these countries cannot bear the adjustment pain all on their own.

I have repeatedly stressed the point that Germany and other countries in the German bloc ( including Austria, Finland , Netherlands, and possibly Poland) need to reflate their economies to create stronger internal demand and create rising deficits which can absorb the run down of deficits in the austerity countries.

There is a rising chorus of senior economists making the same argument and warning Germany that their attempt to create A Europe in the German image will backfire with dire consequences.

See this quote from an article titled ' The German model is not for export', published in The Financial Times of 8th May 2013 written by Martin Wolf , their senior economic editor:

The implications of the attempt to force the eurozone to mimic the path to adjustment taken by Germany in the 2000s are profound. For the eurozone it makes prolonged stagnation, particularly in the crisis-hit countries, highly likely. Moreover, if it starts to work, the euro is likely to move upwards, so increasing risks of deflation. Not least, the shift of the eurozone into surplus is a contractionary shock for the world economy. Who will be both able and willing to offset it?The eurozone is not a small and open economy, but the second-largest in the world. It is too big and the external competitiveness of its weaker countries too frail to make big shifts in the external accounts a workable post-crisis strategy for economic adjustment and growth. The eurozone cannot hope to build a solid recovery on this, as Germany did in the buoyant 2000s. Once this is understood, the internal political pressures for a change in approach will surely become overwhelming.Europe will not become a bigger Germany. It is foolish to believe it ever could. The eurozone will either achieve a better-balanced resolution of its difficulties or break up. Which of the two will it be? That remains the big unanswered question.

But the question has to be answered soon after the Germans choose their next Chancellor, whether to re-mandate Merkel or offer Steinbruck the SPD challenger a chance to avoid the great dangers of continuing with Merkel's austerity above all policy.

The Germans must learn to re-embrace Keynes, or the Euro has no future.

And on the fore-front of the necessary change of course there must be the European Central Bank (ECB). President Draghi must continue showing his mettle to extract his organisation from domination of German thinking and ensure that the ECB acts as central bank is designed to act when facing an existential threat for its currency. Otherwise the ECB will be like a fire-engine without water in its tanks. Who needs one?